Not only should Greece, Spain, Italy, Portugal and Ireland become more like Germany, but Germany will have to become more like Greece, Spain, Italy, Portugal and Ireland if the euro is to survive. That was a sort of compromise solution suggested by some of the panelists at the recent Kilkenomics Festival of Economics and Comedy in Ireland.
Heiner Flassbeck, the chief economist at the UN Agency for World Trade and Development and also a former minister of state in the German ministry of finance, was ironically the most vocal critic of Germany’s role in the current euro zone crisis.
Flassbeck, who said he had been supportive of the euro project, contended that much of the current crisis was a result of Germany’s “wage dumping”. He said Germany pursued a policy of restraining the cost of labour, which enabled the country to become extremely competitive against its euro partners.
“Now the Germans are asking others to do what Germany did (to become more competitive by cutting labour costs), but that would be pointless because Germany was only able to become more competitive because the other euro countries behaved the way they did.”
Behaving the way they did involved the currently crisis-ridden EU countries enjoying significantly higher living standards than they would have enjoyed had they maintained their own currencies. It meant that the citizens of Greece, Italy, Portugal, Spain and Ireland were able to buy a whole load more stuff from Germany than they would otherwise have been able to afford.
Flassbeck argues that the current crisis is inappropriately diagnosed as a budget deficit crisis and should instead be seen as a “competitiveness gap” crisis. “The euro will not survive unless we tackle this (competitiveness) problem.”
He is convinced that the search for solutions to the current situation has to involve Germany increasing its labour costs.
On the same panel Will Hutton, an author and a governor of the London School of Economics, said one of the biggest challenges for Europe was “how does it live with Germany”. Three wars within 75 years highlighted this challenge, said Hutton. “But nothing worked because Germany is too bloody good.”
Flassbeck reiterated that this was why it was incumbent on Germany to stop “wage dumping”.
The fact that Greece, Spain, Portugal, Italy and Ireland are not like Germany and, no matter how hard they try, are unlikely to become more like Germany within the foreseeable future, highlights one of the major design faults in the 10-year old euro project.
It is a point that was touched on by Francis Fukuyama in his recent address to a UCT audience, when he described how it had taken France 400 years to evolve to where it is today. During those same 400 years Germany’s evolutionary process was leading to a very different outcome, as was Greece’s, Italy’s, Spain’s, Portugal’s, Ireland’s and so on.
Given the evident differences it is remarkable that anyone believed a single currency, the euro, could meet the needs of 17 different states and 17 different economies. And while it could be argued that Holland, Luxembourg, Germany and Austria have sufficient in common to hold together a single currency, the further you move from Frankfurt the fewer the areas of commonality. By the time you reach Greece or Ireland the areas of commonality are few and far between.
This lack of commonality is clearly evident in the ongoing efforts to address the crisis by the various heads of the 17 member states. Even though these efforts have been dominated by just two countries, Germany and France, it is daily apparent that there is no-one who is able to lead on behalf of euroland or to produce a solution that would be acceptable to all the members.
“Solutions” are being foisted on the hapless offenders in a manner that gives rise to concerns about democracy. Thus there has apparently been limited if any involvement of Greek politicians in the series of solutions that have been presented to Greece.
Similarly, the recent repurchase of e750 million (R8 billion) of unsecured bonds issued by the now defunct Anglo Irish Bank appears to have been forced upon the cash-strapped Irish government by its EU “partners”.
As US economist Jeffrey Sachs said last week after attending the fractious Group of 20 meeting in Cannes, every leader involved in these discussions is constrained by the need to address the concerns of his or her own electorate.
And so the crisis remains unresolved. And because it is unresolved and there is no evident leadership, the situation gets worse as citizens across Euroland become increasingly nervous and uncertain about what is being achieved by the savage cutbacks.
Over the past 10 days – in the wake of the latest Greek crisis – this nervousness and uncertainty has led to a flurry of commentary on a possible break-up of the euro. Despite growing evidence that the straight-jacket of the euro would make it extremely difficult for any individual country to implement corrective economic steps, during the past three years there has been little or no discussion of a break-up of the euro. This can be explained in part by the fact the EU does not provide for a break-up; there is no mechanism by which a country can leave the euro.
Indeed, until the recent Lisbon Treaty was implemented, there was no mechanism allowing a country to leave the EU.
A second significant explanation for the lack of discussion on a euro break-up is the extreme difficulty that faces any country that moves out of the euro back to its own currency.
In the case of Greece, for instance, there would be a run on banks in the days, hours and minutes leading up to the implementation of such a move. Anyone with euro deposits in Greek banks would then be looking at drachma deposits. There would be considerable uncertainty about whether or not cross-border loans into Greece would be euro-denominated or drachma-denominated.
A recent article in the Financial Times revealed that, in anticipation of just such chaos, European leaders extracted a key concession from Greece during last month’s negotiations. “The legal jurisdiction for the country’s outstanding bonds was switched from Greece to the UK, making it in effect impossible for Athens to redenominate them,” the Financial Times wrote.
Such would be the extent of initial chaos that it is no wonder the Greeks prefer to bumble along within the euro – for now.
Longer term they may, or may not, try to be more like the Germans.